subjects), and auditor cannot express an opinion (records were destroyed)

Owner contributes cash... (record transaction)

Debit cash, credit liabilities

Busy equipment on credit... ... (record transaction)

Debit assets, credit accounts payable

What happens when there is an increase in revenue?

An increase in profit and increase equity

Buys equipment on credit ... (record transaction)

Asset would be debited; accounts payable credited

Takes out a loan from the bank ... (record transaction)

Cash be debited; liability (loan, or AP) credited

Sells goods on credit ... (record transaction)

Debit AR and credit Revenues not Received

Sell goods for cash ... (record transaction)

Debit Cash; credit revenue

Receive cash from goods that we sold on credit?

Cash debited; AR would be credited; Revenue not received would be credited, revenue would be debited

Pay cash for expenses

Credit cash; debit expenses

Pay cash to suppliers ... (record transaction)

Credit cash; Debiting AP

Receives cash from customers

Debit cash; credit revenue

Depreciate equipment ... (record transaction)

Equipment credited; debit accumulated appreciation;

What is a business entity?

Business activities are

separate from personal activities (eg sole proprietorship; accounting activities are separate from personal even though they’re legally the same in a sole proprietorship). Corporations exist to limit liabilities for investors, give the company indefinite life, allow managers to act on behalf of entity without assuming personal liability when

signing contracts.

What is the accrual principle?

· (as opposed to cash flow-based accounting which

can distort results as accounting items are only recorded when the cash is

spent/received). Recognizes that things

like buildings are valuable over a long period of time and depreciate. Estimate the value of what gets created or

used up whether it is cash or not. Cash

may happen before (pre-paying insurance), during (sales), or after (cash on an

account receivable). When should we

recognize a revenue? Lots of accounting

discussion around this question. In

general: revenue recognition is:

1.

Goods or

service received

2.

Revenue

can be measured or estimated reasonably accurately (final price may depend on

factors like performance of completed product)

3.

Expenses

can be measured or estimated and have been incurred (need to remember to

account for expenses like warranty)

4.

Cash or a

reasonable promise of payment has been received

= GREC

What is the matching principle?

Match revenues with

expenses incurred in the same period so that you can make economic decisions.

what is a going concern

Not accounting’s job to

figure out whether the company can continue to run, we just assume it will. Can have implications for things

like accounts receivable (who would pay up if you were going bankrupt).

Consistency/comparability - what is meant by this?

Consistency is your policies are the same year over year; accounting policies don’t change willy-nilly. Comparability means that you use accepted methods of presenting information to competitors in the industry; auditors would question why you would be doing something different.

What is the Confirmative value?

Information

that helps determine whether expectations have been met. For example, the income statement provides

information about whether the company met earnings expectations.

What is the predictive value?

Information that helps capital providers make decisions about the future. For example, the statement of cash flows can provide information about whether the company has sufficient funds to expand or if it needs to raisefunds from capital providers.

What is materiality?

The

amount/information matters to decision makers; it is of sufficient magnitude

that knowing or not knowing the information would (potentially) change the

decision. For example, a $1mil

estimation error may be material to a $10mil company, but not a $100bil

company.

What happens when you record cost of goods sold?

COGS are debited; Inventory is credited

How do you calculate retained earnings?

Subtract all expenses from revenues; the balance is added to your retained earnings.